The 24 banks, currently operating in the country, registered an after-tax profit of GH¢1.1 billion, representing year-on-year growth of 38.9 percent compared with 5.8 percent growth for the same period last year.

The profit margin is remarkable growth, after the clean-up of the banking industry.

Majority of the profits were recorded largely by the tier-one and tier-two banks.

According to the May 2019 Banking Sector Report, the higher growth in net profit was underpinned by higher growth of net interest income during the review period. Net interest income grew by 21.6 percent on account of higher interest income from investments and lower interest expenses from reduced borrowings on the back of increased deposits mobilized.

Net fees and commissions moderated to 4.3 percent compared with 20.0 percent growth in the same period last year, attributable to the slowdown in the volume of off-balance sheet activities. Operational expenses grew by 9.5 percent, higher than the previous year’s growth of 3.6 percent.

The report added that in summary, the sector’s profitability performance was enhanced by strong net interest income and cost control

Return on Assets & Return on Equity

According to the report, the improved profitability levels during the period under review positively reflected in the main indicators, namely, after tax Return on Equity (ROE) and before-tax Return on Assets (ROA).

The ROE computed as a ratio of after-tax income to average shareholders’ funds increased to 18.9 percent in April 2019 from 17.3 percent in April 2018. Similarly, the ROA measured as the ratio of income before-tax to average total assets increased to 4.1 percent from 3.6 percent during the same comparative period, pointing to improved profitability within the banking industry.

Composition of Banks’ Income

The report emphasized that the composition of banks’ income broadly reflected the shares of the various components of total assets. Thus, the share of investments income in banks’ income rose with its share in total assets.

Investments (both short and long-term) constituted the largest source of income for banks, with its share increasing to 44.5 percent in April 2019 from 42.6 percent in April 2018.

However, the share of income from loans declined to 34.7 percent from 38.0 percent during the period under review, following the decline in the size of loans in the industry’s assets.

The share of banks’ income from commissions and fees also declined to 12.0 percent in April 2019 from 12.6 percent a year earlier, while other income sources from non-core banking activities inched up to 8.8 percent of their total income from 6.9 percent over the same period in 2018.

Liquidity Indicators

For liquidity, the banking sector remained liquid during the review period although some marginal declines were recorded in some liquidity indicators.

The ratio of core liquid assets (mainly cash and due from banks) to total deposits declined to 33.8 percent in April 2019 from 37.7 percent in April 2018. The decline in the ratio was due to the fact that total deposits increased while cash holdings of banks declined as banks shifted the asset mix into longer-dated earning assets.

Capital Adequacy Ratio

The banking industry’s ability to absorb losses using its capital was enhanced in April 2019.

The industry’s solvency, measured by the Capital Adequacy Ratio (CAR) the report noted increased to 21.4 percent in April 2019 from 18.9 percent in April 2018 reflecting the impact of the recapitalization exercise.

Interestingly, even under the enhanced Capital Requirement Directive, which imposes more stringent criteria on the industry to ensure risks are properly aligned with capital, the industry’s CAR was 17.4 percent, compared with the 13.0 percent prudential requirement (inclusive of a 3 percent buffer for CRD).

The quality of banks’ capital also improved with the recapitalization, indicated by the sharp increase in the Tier 1 CAR to 19.6 percent from 16.3 percent during the period under review. Banks’ risk-weighted assets (RWA) to total assets declined from 63.4 percent in April 2018 to 56.0 percent in April 2019 reflecting the increasing share of investments (which carries a lower risk rating) in banks’ asset mix.

Asset Quality

According to the report, the industry’s asset quality improved significantly during the period under review.

The stock of the industry’s Non-Performing Loans (NPLs) declined from GH¢8.63 billion in April 2018 to GH¢7.16 billion in April 2019, representing a contraction of 17.0 percent compared with the 20.8 percent growth recorded a year earlier.

The decline in the stock of NPLs coupled with the marginal pick-up in credit growth translated into a lower NPL ratio of 18.9 percent in April 2019 from 23.5 percent a year ago. When adjusted for the fully-provisioned loan loss category, the NPL ratio declines to 9.0 percent from 12.2 percent, signaling a slowdown in deterioration of loan quality.

The private sector accounted for 97.3 percent of the industry’s NPLs in April 2019, up from the 90.7 percent recorded in April 2018, while the public sector’s contribution declined to 2.7 percent from 9.3 percent over the same comparative period.

Indigenous private enterprises accounted for a lower 75.1 percent of total NPLs in April 2019 compared with 76.9 percent in the corresponding period in 2018, while the contribution of foreign enterprises increased to 8.9 percent from 7.6 percent.

The contribution of households to the banking industry NPLs rose with the increase in their share of the industry credit, accounting for 12.1 percent of total NPLs in April 2019, compared with a share of 5.6 percent a year ago.

Conclusion

In conclusion, the banking sector’s performance has been enhanced following the recent reforms and recapitalization of the sector.

Key financial soundness indicators showed broad improvements in April 2019 compared with the same period in 2018. The sector had a strong balance sheet in April 2019, with growth underpinned by robust annual growth in deposits and paid-up capital, while profitability growth was also strong.

Asset quality, however, remained a concern even though credit risk moderated over the period under review.

The adoption of the Basel II/III framework is timely as it is expected that banks’ adherence to good credit risk management practices will contribute to reducing non-performing loans and promote credit expansion, growth and profitability within the industry.